Wednesday, March 24, 2010

Media pendulum swinging toward short sellers?

I was shocked, shocked, when I found two stories today outlining the constructive roles short sellers play in the market.

At, Susan Antilla, a Wall Street columnist for Bloomberg excoriates regulators and calls short sellers "important contributor(s) to keeping markets honest." Here are a couple of the many zingers in the article:
  • "With regulators taking a refreshing two-decade snooze, it’s now up to judges, plaintiffs’ attorneys, short sellers, bloggers and detectives to fill in for the somnolent stock cops."

  • "...regulators and whiny corporate executives often think the wise way to deal with shorts is to investigate them -- not the public companies they target for incompetence or cheating."
The New York Observer has a Q&A with Jim Chanos of Kynikos Associates. He touches on Lehman, health care, politics, Goldman Sachs, among other topics. Some highlights:

  • "People thought [Lehman Bros.] were tough, no-nonsense guys. But we were saying, actually, they’re incredibly aggressive risk takers with a wide berth for what they consider the truth."

  • "Putting more and more money into housing and keeping us healthy in our golden years doesn’t necessarily make us a more productive society. We should be devoting more of that money to technology and education."
Is the media pendulum really swinging toward understanding how short sellers work? Not yet, but people are beginning to realize that there is an important function for contrarians in the market.

Wednesday, March 10, 2010

Walking the talk on transparency

Why is a guy like Steven A. Cohen, who didn't used to even play golf with investors, sitting for a cover story in Bloomberg Markets magazine? Why is he inviting reporters into his firm right after SAC Capital 's name was linked to insider trading and the collapse of Galleon? Because he's smart. That's why. He understands that the rules have changed and that transparency, not performance, is now the name of the game. (And he's getting good counsel from his PR firm.)

SEI's The Era of the Investor: New Rules of Institutional Hedge Fund Investing study found that institutional investors said "transparency" was the most important challenge they faced in hedge fund investing. "Performance" was third. Similarly, according to Prequin's Global Hedge Fund Investor Review, "understandable/transparent strategy" was the most important consideration for institutions when choosing a hedge fund manager.

These days, according to an exec at a family office quoted in the Bloomberg Magazine story, "nobody will invest in an operation that is very clandestine...Even the most crass and abrasive managers are more investor-friendly now."

Engaging with media is an important part of walking the talk on transparency and savvy managers understand this. Furthermore, after the average hedge fund lost nearly 30% in 2008 and the Madoff fraud, most hedge funds need to do more than just ramp up the investor relations and provide more detail in their marketing materials.

Working properly with media can provide third party validation of how a fund thinks, works and generates returns. When this information reinforces what the fund is telling investors and prospects, it makes a difference when they decide to whom and how much to allocate.

In the Bloomberg Markets Magazine story, for example, we get insight into the following important aspects of SAC:
  • SAC's investment process (and how the fund has ended all non-equities trading)
  • The fund's risk-mitigating strategies at work during the credit crash
  • SAC's compliance department
  • How the firm is structured and how the firm runs itself as a collection of 100 small funds
  • How individual managers are held accountable for performance
The story also airs some dirty laundry, like Mr. Cohen's ongoing legal battle with his former wife, but that is anecdotal, in context of what we learn about the inner workings of SAC.

My criticism of the story -- and this extends to the decisions made by the reporters as well as to how SAC managed the boundaries of the story -- is that it details Mr. Cohen's art collection and has a photo of his mansion in Connecticut. It would better serve the interests of the firm had the focus of the story been all business (lose the list of Cohen's charitable contributions while you're at it) and included more commentary from other SAC investors (the story only quotes one).

To get an idea of what hedge funds should aspire to, when it comes to media, read the excellent profile of Bridgewater Associates in Fortune last year. It is noteworthy for two reasons. First, it avoids wasting ink on the fluff that too often permeates reporting about the hedge fund industry. More important, it articulates why investors choose to do business with Bridgewater.

This explanation of the "demand side of the hedge fund equation" is precisely what is lacking in media coverage of the industry and the opportunity for hedge funds to use media to demonstrate the value they provide clients, in their own words, is priceless.

Thursday, March 4, 2010

It's not the hedge funds, stupid!

Ready, fire, aim. That's what the Justice Department appears to be doing in opening an investigation on whether hedge funds colluded to bet against the Euro. SAC Capital, Greenlight Capital, Soros Fund Management and Paulson & Co. are among the funds who have received inquiries from Justice.

The inquiry partly stems from the fact that several hedge fund managers were in attendance at an "idea dinner" hosted by advisory firm Monness, Crespi , Hardt & Co. where investing ideas were discussed.

This "investigation" shows us, as if we needed convincing, two things. First, hedge funds continue to draw unwarranted scrutiny from regulators and media. Second, and more important, it is more proof that the deeply-rooted long-bias in our system of financial oversight is not changing.

This systemic bias that extends from Main Street to Pennsylvania Avenue is becoming the single largest threat to hedge fund reputation and operations.

Was it a mystery that Greece was overleveraged? No. It seems that months ago we saw reporting that currency and sovereign debt traders coined the word PIGS as a pejorative for the European economies bound for trouble (Portugal, Italy, Greece, Spain). Why wouldn't hedge funds or any other investment manager realize the same thing and try to profit from that assumption?

Where is the accountability? It's like Greece, Bear Stearns, Fannie Mae, Enron (the list goes on) were not to blame. We are led to believe that it was the "speculators," "short sellers," or "profiteers" who caused the problem.

Every trade has a buyer and a seller. Someone wins and someone "loses." Shorting is the same buying and, technically, has more risk (because the security can appreciate to infinity, while it can only depreciate to zero).

There are too few voices trying to set the record straight. Here are a couple:

Jim Chanos, quoted in the Wall Street Journal, today explains that going long the dollar is "exactly the same trade as going short the euro...It gets to a certain point of demonizing traders and hedge funds for mistakes elsewhere."

Peter Eavis, financial columnist for The Wall Street Journal acknowledges media and government overreaction to trading activity related to Greece's crisis and the fall in the Euro. He writes, "it appears that hedge funds are seen as more suspicious than other market participants....any evenhanded probe woul have to involve [banks] too. And how about the companies that sell Euros as a hedge for their business operations? Perhaps the more prosaic truth is that there are good reasons for the Euro to fall."

Tuesday, March 2, 2010

Goldman adds bad press to list of business risks

Goldman Sachs, in its most recent 10-K filed with the SEC, acknowledges risks to its business associated with bad publicity and hits to its repuation.

Goldman writes, "The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or elected officials. Press coverage and other public statements that assert some form of wrongdoing, regardless of the factual basis for the assertions being made, often results in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the time and effort of our senior management from our business."

See the section entitled, "We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity" in the 10-K at the bottom of page 34. The section on reputation risk is number 17 of 24 material risks identified by Goldman.

Goldman is correct to draw a clear link between what is reported in the media and what happens on Capitol Hill. The risk that incomplete or erroneous media coverage results in unnecessary or harmful legislation is real. Just think about all the fuss about short selling.

Goldman Sachs' PR problems have been getting a lot of attention recently. Goldman Sachs recently hired a lobbying and PR firm founded by Dan Bartlett and Mark McKinnon, former message masters from the George W. Bush White House. Even Goldman's PR chief has become the object of media coverage.

I suspect that much of the criticism of Goldman will fade into the background with time, especially if the banking industry recovers relatively quickly (and that's a big if). Fundamentally, financial institutions need to pick their battles and fight to win when they choose to engage with media. For example, executive compensation is not a good battle to fight in the press. I don't think that banks can win.

However, ongoing misinformation in the media about market mechanics and trading activity, like negative press about hedge funds shorting Greek sovereign debt, is another matter. That the media don't acknowledge that there are two sides to every trade continues to boggle my mind.

Goldman is not the first financial firm to acknowledge reputation risk in the fine print. In late 2008, Pershing Square Capital Management cited reputation risk as a concern for the fund and the industry in its letter to LPs.

If anyone knows of any other public companies or banks citing reputation risk in SEC filings, please let me know.
UPDATE: On March 8, Goldman was sued by a pension fund for its its pay practices, which, according to the suit, "vastly overcompensate management and constitute corporate waste."

Thursday, February 11, 2010

John Bogle to institutional investors: Stop being part of the problem

In a recent op-ed in The Wall Street Journal, investing legend John C. Bogle argues that institutional investors need to change the way they do business and begin to assert their fiduciary responsibilities as dominant shareholders. The ability for institutional investors to exert activist pressure on corporations to ensure the creation and preservation of value for investors is among the remedies Bogle seeks.

Bogle indicts institutional investors, who control 70% of shares of U.S. corporations, on several levels and writes, the "failure of money managers to observe the principles of fiduciary duty played a major role in allowing our corporate managers to place their own interests ahead of the interests of their shareholders."

He says that the apathy of instituional investors is partly to blame for a range of ills including the rise of speculation over long-term value investing, the ready acceptance of financial engineering and "innovation," and excessive corporate compensation systems.

At the same time, Bogle sees institutional investors as having the potential to be agents for positive change and as having the potential to act as important corrective forces in better functioning financial markets. This blog calls that kind of dynamic the new financial world order. The role of institutional investors, including, ostensibly, hedge funds is important, Bogle says, because government is ill-equiped to effectively police the markets. "There are few regulations that smart, motivated, targets cannot evade," he writes.

A recent example of an institutional investor trying to use its weight to enforce fair play is AllianceBernstein's opposition to the terms of Novartis' takeover of Alcon. The deal would pay Nestle, the majority shareholder in Alcon $180 per share, while minority shareholders in Alcon will receive $147.

The New York Times piece linked above notes that it is rare for AllianceBernstein to take such a public stand that challenges corporate interests. That's because the bar is too low for mutual- and pension- fund managers. They don't have enough incentive to put the time and effort into correcting corporate abuses and they simply shift their assets elsewhere. Bogle believes that has to change.

Clearly, though, hedge funds are incentivized to take on corporate boards and constructively use activist strategies to enhance the value of their investment. In the Alcon situation, getting $180 per share for the minority holders represents at 22% increase in value. What hedge fund wouldn't pursue that?

Hedge funds need to take the lead in ensuring corporations deliver value and need to, when appropriate, get other money managers to support activist campaigns. There is no lack of targets. Morgan Stanley reported that compensation at the firm last year represented 62% of net revenue. TIAA-Cref, Oppenheimer, and Calvert Asset Management are among the institutions publicly decrying the situation.

With massive failures of leadership at America's largest (and at one time most respected) companies, like GM, Citigroup, AIG, TimeWarner, etc, it has become easier to effectively criticise boards and the media is more receptive than ever to views that challenge management. Hedge funds and other asset managers can capitalize on that to exert pressure on boards and corporations.

UPDATE: Calpers' portfolio of funds that challenge underperforming companies exceeded the return of the S&P 500 by 8.2% since 1999. "The long-run returns for experienced activists should again beat the broader market. Slumbering boards beware," writes a column by BreakingViews on the market prospects for activist hedge funds.

Thursday, February 4, 2010

New Citi Web site takes positive message straight to Main Street

At the beginning of February, Citigroup launched a new Web site to speak directly to clients, employees, shareholders and other stakeholders. Called The New Citi Blog, the site is part blog, part social media and all extension of Citi's PR and internal communications departments.

Featuring video testamonials from a range of Citi employees and already two posts by CEO Vikram Pandit, the site tries to send multiple messages to multiple audiences. Citi is a good place to work, Citi values its clients, Citi is serious about risk management, the Citi organization is getting better at working together.

Citi might or might not be a viable institution in its current form, but this new Web site is a good tool to communicate management's vision and put a human face on the much maligned bank. Citi is taking advantage of the Web to go around media to get its message direct to stakeholders. Sure, media is still important and the third party validation is more valuable than the obvious corporate spinning going on at, but this could be an important tool to reach the people Citi needs to reach. Besides, it is unlikely that the media are buying whatever Citi is selling, so the bank needed a new channel.

Companies need to realize that the Web and social media provide conduits to go direct to the stakeholders that matter the most. Before these technologies it simply was not possible to effectively present a company's view of complex situations or defend itself from criticism, much less engage people -- in large numbers -- in a dialog. Companies now can inject their own voice into the debate and have new tools to actively take charge of their reputation.

For this reason, I routinely disagree with PR people who say that the Internet has killed the news release. If anything, news releases are more valuable now than they ever have been, because of the reasons above and the fact that a news release on the Internet now has a more diverse audience than just the media.

The media still matter. It's just that now the media don't necessarily have to have the last word.

Monday, January 25, 2010

A bulge of media opportunities for non-bulge-bracket banks

It is "morning in America" if you happen to be a non-bulge bracket bank. Think about it: your larger, previously-unassailable competitors have either dissolved or are consumed with their own issues (TARP, compensation, regulation, risk management, etc) and now, finally, second- and third-tier institutions have a historic chance at grabbing market share.

From a media relations perspective the opportunity is simply amazing. Again, think about the landscape: Bear Stearns - gone; Lehman - gone; Merrill Lynch - gone(ish); Citigroup - utterly consumed with their own operating issues; Morgan Stanley - retrenching, then expanding, probably only to retrench again; Bank of America - too big to succeed. These firms were the go-to providers of analysis in media coverage of capital markets, equity research, corporate earnings, M&A, industry trends, currency markets, economic trends, etc. They simply dominated the Wall Street Journal, Reuters, Bloomberg, BusinessWeek, The New York Times, and other major financial media. Not any more.

Not only have firms disappeared or retrenched, but the reputations of the survivors are seriously compromised. First came the questions of culpability of major banks in the mortgage/financial crisis. Then came the restrictions accompanying TARP bailouts. Now, the big banks are up against the wall over the issue of compensation. This will be the hardest bullet to dodge and look for compensation issues to persist througout 2010.

Moroever, the media understand now that they have almost a fiduciary duty to broaden their sources away from the large banks and trading firms. This, combined with heightened skepticism by reporters and deeply seeded resentment (in my opinion) about compensation practices, opens the door like never before for smaller firms in virtually every financial sector to enhance their brands and market themselves through the media.

Since September, my firm has been representing a small fixed-income broker-dealer that had no previous experience in working with media. Our hypothesis at the start of the engagement was that the media would welcome a new voice for analysis of credit market trends. We were right and even underestimated media demand for the client's perspective. More than 80 stories in major financial media cited the firm's credit market expertise.

I mention this to underscore the size of the opportunity for firms that previously may have been at competitive disadvantage when it came to media relations. Even compensation comes into positive focus in a story about a mid-tier broker-dealer like Jefferies.

Already, non-bulge-bracket firms are scrambling to fill the vaccuum created in markets ranging from credit trading to M&A advisory. Firms like Cantor Fitzgerald are hiring like crazy. Citadel's foray into investment banking has been well chronicled. Now, Blackstone is said to be interested in entering the banking market in the U.K.

It's not all downhill sledding, though. Last summer the head of marketing of a leading broker-dealer told me that despite all the carnage at the top of the market, his firm's research showed lingering client preference for doing business with the old guard firms.

Asserting themselves more through the media can help mid-size firms overcome client inertia to expanding their list of preferred banking and trading partners.

To illustrate how much the compensation issue can derail the large banks, here is a sampling of recent stories: